<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended July 31, 1998 Commission file number 0-23496
------------- ---------
KFC National Purchasing Cooperative, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 61-0946155
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
950 Breckenridge Lane, Louisville, KY 40207
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(address of principal executive offices) (zip code)
Registrant's telephone number, including area code (502) 896-5900
-----------------------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
---- ---
Number of shares of common stock outstanding as of August 31, 1998
-----------------
Membership Common Stock 681
---
Store Common Stock 6595
----
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
DBA Foodservice Purchasing Cooperative, Inc.
<PAGE> 2
INDEX TO QUARTERLY REPORT FORM 10-Q
Part 1 - Financial Information
<TABLE>
<CAPTION>
Page (s)
--------
<S> <C> <C>
Item 1 Financial Statements
Condensed Consolidated Statements of Income
Three months ended July 31, 1998 and 1997 3
Condensed Consolidated Statements of Income
Nine months ended July 31, 1998 and 1997 4
Condensed Consolidated Balance Sheets
July 31, 1998 and October 31, 1997 5
Consolidated Statements of Cash Flows
Nine months ended July 31, 1998 and 1997 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-9
Part II - Other Information
Item 4 Submission of Matters to a Vote of Security - Holders 10
Item 6 Exhibits and Reports on Form 8-K 10
Signatures 11
</TABLE>
2
<PAGE> 3
Part I - Financial Information
- ----------------------------------
Item 1. Financial Statements
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
For the three months ended July 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----- ----
<S> <C> <C>
Net sales $ 169,404,360 $ 169,353,350
Cost of goods sold 164,976,667 164,542,434
------------- -------------
Gross profit 4,427,693 4,810,916
Selling, general and administrative expenses 3,527,639 3,101,045
Provision for losses on receivables 347,410 38,794
Other income (expenses):
Service charges 42,960 66,562
Interest income 14,620 50,757
Interest expense (35,080) (78,754)
Miscellaneous 53,046 18,423
------------- -------------
75,546 56,988
------------- -------------
Income before patronage
dividend and income taxes 628,190 1,728,065
Patronage dividend 491,925 1,211,150
------------- -------------
Income before income taxes 136,265 516,915
Provision for income taxes 58,319 197,386
------------- -------------
Net income $ 77,946 $ 319,529
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 4
Part I - Financial Information
- -------------------------------------
Item 1. Financial Statements
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
For the nine months ended July 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----- ----
<S> <C> <C>
Net sales $ 472,724,556 $ 443,336,742
Cost of goods sold 460,024,244 431,156,769
------------- -------------
Gross profit 12,700,312 12,179,973
Selling, general and administrative expenses 10,302,297 8,979,681
Provision for losses on receivables 442,421 116,544
Other income (expenses):
Service charges 135,962 94,825
Interest income 191,752 264,663
Interest expense (161,885) (219,096)
Miscellaneous 95,383 69,385
------------- -------------
261,212 209,777
------------- -------------
Income before patronage
dividend and income taxes 2,216,806 3,293,525
Patronage dividend 1,798,052 2,226,489
------------- -------------
Income before income taxes 418,754 1,067,036
Provision for income taxes 182,230 441,649
------------- -------------
Net income $ 236,524 $ 625,387
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
July 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Derived from
Audited
Financial
Statements
Assets July, 31 October 31,
------ 1998 1997
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 132,471 $ 160,065
Accounts receivable, less allowance for
losses of $1,830,742 at July 31, 1998 44,170,451 41,039,523
and $1,408,727 at October 31, 1997
Inventories:
Food 1,397,294 1,661,623
Equipment and promotional items 2,152,767 3,852,811
------------ ------------
3,550,061 5,514,434
------------ ------------
Current portion of note receivable from related party 60,000 60,000
Prepaid expenses and other current assets 114,012 129,885
Current portion of deferred income taxes 757,750 614,294
------------ ------------
Total Current Assets 48,784,745 47,518,201
------------ ------------
Office equipment, net 833,209 659,945
Investment in marketable equity security available for sale 70,760 0
Note receivable from related party, excluding current portion 117,948 117,948
Note receivable, excluding current portion 0 831,789
Deferred income taxes, excluding current portion 136,489 108,028
Other assets 510,151 564,429
------------ ------------
Total Assets $ 50,453,302 $ 49,800,340
============ ============
Liabilities and Member's Equity
Current Liabilities:
Short-term borrowings $ 417,422 $ 572,394
Accounts payable 24,178,992 21,124,259
Accrued expenses 2,734,056 4,298,449
Premium deposits 328,127 328,807
Patronage dividend 1,798,138 2,890,324
------------ ------------
Total Current Liabilities 29,456,735 29,214,233
------------ ------------
Long-term note payable 3,000,000 3,000,000
------------ ------------
Commitments and Contingencies
Members' Equity:
Membership common stock 6,820 6,650
Store common stock 1,884,457 1,700,490
Unrealized gain on marketable equity security 16,385 0
Retained earnings 16,166,372 15,929,848
Currency translation adjustment (77,467) (50,881)
------------ ------------
17,996,567 17,586,107
------------ ------------
Total Liabilities & Members' Equity $ 50,453,302 $ 49,800,340
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 6
KFC NATIONAL PURCHASING COOPERATIVE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the nine months ended July 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 236,524 $ 625,387
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 303,934 267,888
Disposal of assets -- 7,099
Provision for losses on receivables 422,015 116,544
Deferred income tax benefit (171,917) (20,253)
Changes in operating assets and liabilities:
(Increase) in accounts receivable (3,552,943) (12,124,651)
Decrease in inventories 1,964,373 509,950
Decrease in refundable income taxes -- 32,115
(Increase) decrease in prepaid expenses and other current assets 15,873 (35,491)
Increase in accounts payable 3,054,733 4,462,280
Increase (decrease) in accrued expenses (1,564,393) 491,162
(Decrease) in premium deposits (680) (3,234)
(Decrease) in patronage dividend (1,092,186) (535,229)
------------ ------------
Net cash provided by (used in) operating activities (384,667) (6,206,433)
------------ ------------
Cash Flows from Investing Activities:
(Increase) decrease in other assets 18,584 (463,652)
Decrease in note receivable from related party -- 34,543
Decrease in notes receivable 831,789 --
Purchase of marketable equity security (54,375) --
Additions to office equipment (441,504) (260,160)
------------ ------------
Net cash provided by (used in) investing activities 354,494 (689,269)
------------ ------------
Cash Flows from Financing Activities:
Increase (decrease) in short-term borrowings (154,972) 184,011
Proceeds from sale of stock, net of costs 232,207 70,645
Retirement of stock (48,070) (49,590)
------------ ------------
Net cash provided by financing activities 29,165 205,066
Effect of exchange rate changes on cash and cash equivalents (26,586) (13,299)
------------ ------------
Net (decrease) in cash and cash equivalents (27,594) (6,703,935)
Cash and cash equivalents - beginning of period 160,065 6,875,629
------------ ------------
Cash and cash equivalents - end of period $ 132,471 $ 171,694
============ ============
Supplemental information:
Income taxes paid $ 56,500 $ 197,375
============ ============
Interest paid $ 66,702 $ 219,096
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE> 7
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
-----------------------------------------------
1. Basis of Presentation
The accompanying financial statements are presented in accordance with the
requirements of Form 10-Q and consequently do not include all of the disclosures
normally required by generally accepted accounting principles or those normally
made in the registrant's annual Form 10-K filing. Accordingly, the reader of
this Form 10-Q may wish to refer to the registrant's Form 10-K for the year
ended October 31, 1997, for further information in this regard.
The accompanying financial statements for comparative purposes have been made to
conform to the format of the registrant's Form 10-K for the year ended October
31, 1997, and have been prepared in accordance with the registrant's customary
accounting practices and have not been audited. In the opinion of management,
all adjustments (consisting of only normal recurring accruals) necessary for
fair presentation of this information have been made.
Item 2. Management's Discussion and Analysis of Financial Position and Results
of Operation.
The following discussion and analysis of financial condition and the condensed
consolidated results of operations should be read in conjunction with
management's discussion and analysis of financial condition and results of
operations in the company's October 31, 1997, Form 10-K. The results of
operations for the nine months ended July 31, 1998, are not necessarily
indicative of the operating results for the entire year.
Results of Operations
First Nine Months of Fiscal 1998 Compared to the First Nine Months of Fiscal
1997.
A comparison of material changes between the nine months ended July 31, 1998 and
the comparable period for the previous year shows:
Net sales increased by $29,387,814 from the first nine months of fiscal 1997.
The increase in year-to-date sales was primarily attributable to Taco Bell with
a 32% increase. For the first nine months KFC-U.S. showed an increase of 2.3% in
food and packaging sales while equipment was down 27% compared with 1997. The
termination of the Fazoli's business and the bankruptcy of Long John Silver's
will effect sales for the remainder of 1998. Year-to-date 1998 sales in our
Canadian subsidiary were approximately $35,578,000 resulting in a decrease of
$1,676,000 from the same period in 1997.
Gross profit as a percentage of sales for the first nine months of 1998
decreased slightly from 2.84 to 2.61% as planned by management. Gross margins
are constantly being evaluated to provide competitive prices to our customers
while maintaining the profit level of service required to fulfill the
Cooperative's mission.
Selling, general and administrative expenses increased by $1,322,616 from 1998
to 1997. The increase in expenses is primarily attributable to the inclusion of
international for an entire year in 1998, along with increased travel associated
with of the Cooperative's efforts to focus on working more closely with our
customers and additional board meetings. Management is constantly monitoring
costs to provide the required service at the lowest cost to the stockholder
members.
7
<PAGE> 8
Management believes the current provision for losses on uncollectible accounts
to be adequate. The Cooperative has conducted a purchasing program for Long John
Silver's operations. On May 29, 1998 the Cooperative notified Long John Silver's
that it was terminating the program before the end of June 1998. On June 1,
1998, Long John Silver's filed a voluntary petition for relief under Chapter 11
Reorganization pursuant to the United States Bankruptcy Code. As a result, the
Cooperative has recognized a $350,000 addition to the reserve for uncollectibles
in the third quarter. The Cooperative believes that it has adequately reserved
for any potential loss associated with this bankruptcy.
The provision for patronage dividend for 1998 has been calculated and accrued on
a formula approved by the Board of Directors. For the third quarter of fiscal
1998, the provision was $491,925 significantly less than last year due to
planned lower net margins and the increase in expenses as discussed above. For
the first nine months the provision for the patronage dividend is down 19% to
$1,798,052. Patronage dividends for fiscal 1998 will be apportioned based on
stockholder concepts and their relative contribution to income before patronage
dividend and taxes.
In October 1997, PepsiCo, Inc. spun off its three primary restaurant divisions
- --- KFC, Taco Bell, and Pizza Hut --- into a new public company, Tricon Global
Restaurants, Inc. ("Tricon"). Also during fiscal 1997, PepsiCo sold its
restaurant distribution subsidiary, Pepsi Food Service ("PFS") to AmeriServe
Food Distribution, Inc. ("AmeriServe"). AmeriServe has been and continues to be
the second largest Cooperative customer, purchasing goods for distribution
primarily to KFC franchisees. When AmeriServe purchased PFS, it acquired rights
under a five-year distribution agreement. This agreement binds Tricon to use
AmeriServe distribution services for Tricon owned KFC, Taco Bell, and Pizza Hut
outlets. The agreement also extends to Taco Bell and Pizza Hut restaurants sold
as part of Tricon's announced program of refranchising certain Tricon-owned
restaurants to existing and new franchisees. AmeriServe does not purchase goods
through the Cooperative for distribution under its five-year Tricon agreement.
On May 21, 1998, AmeriServe acquired ProSource, Inc. ("ProSource"). For the year
ended October 31, 1997, ProSource was the Cooperative's sixth largest
distributor with total sales of approximately $19,000,000. AmeriServe has stated
in its public filings that AmeriServe is and will continue to be highly
leveraged as a result of the indebtedness incurred primarily in connection with
its acquisition of PFS. The Cooperative and its members continue to monitor
their relationship with AmeriServe. The impact of Tricon's formation,
AmeriServe's acquisition of PFS and the merger with ProSource on the business of
the Cooperative remains uncertain.
The Cooperative, Tricon, and organizations representing the KFC, Taco Bell and
Pizza Hut franchisees are currently in active discussions regarding whether
Tricon-system franchisee or Tricon-system wide purchasing activities might be
consolidated through the Cooperative or a reorganized cooperative to further
lower store delivered costs of goods. The discussions are preliminary and the
outcome of the discussions cannot be predicted.
Scott's Restaurants, Inc. ("Scott's") is the largest KFC franchisee in Canada,
with approximately 369 retail outlets. The operations of the Canadian subsidiary
are substantially dependant on its business connected with Scott's. On October
10, 1997, following a court ruling favorable to KFC (Canada), KFC (Canada)
delivered a notice termination Scott's franchise license agreement to operate
KFC outlets. Scott's has obtained a stay of the termination pending judicial
appeal. On July 9, 1998, Scott's and KFC (Canada) announced that they had signed
a preliminary agreement providing for the sale to the public of the Scott's KFC
outlets and selected KFC (Canada) owned outlets throughout Canada by way of a
newly organized income trust. The proposed sale is subject to approval by the
shareholders of Scott's, satisfactory completion of due diligence, definitive
agreements, and market conditions at the time of the public offering of income
trust securities. It is the announce intention of both parties that the sale be
completed as soon as possible, but, in any event, by not later than February 28,
1999/ On completion, the parties expect to exchange mutual releases in respect
of the pending litigation. If the transaction does not proceed, the pending
litigation will continue. The Cooperative continues to monitor the Scott's
situation. The loss by the Canadian subsidiary of Scott's KFC business would
have an adverse effect on the Cooperative's Canadian operations.
8
<PAGE> 9
Third Quarter Fiscal 1998 Compared to Third Quarter Fiscal 1997
Net sales for the third quarter 1998 were flat compared to the third quarter of
1997. Food and packaging sales were up by 5.2% or approximately $7,543,000.
Equipment sales on the other hand were down by $7,647,000 or 31.7%. The increase
in food and packaging was primarily driven by Taco Bell with an increase of
40.4% along with increases in International, Dairy Queen and Fazoli's. The
decrease in equipment was attributable to KFC-U.S. down 27.5%. KFC-Canada, Dairy
Queen, Long John Silver's and Fazoli's sales were below 1997 levels.
Financial Condition at July 31, 1998 Compared to Financial Condition at October
31, 1997.
Net working capital at July 31, 1998, was $19,328,010, which is an increase of
$1,024,042 since October 31, 1997. Accounts receivable and the current portion
of deferred income taxes increased $3,130,928 and $143,456, respectively.
Offsetting these increases were the decreases in cash and cash equivalents of
$27,594 and inventories of $1,964,373. In addition, accounts payable increased
by $3,054,733. The increase in accounts payable was offset by decreases in
accrued expenses and patronage dividend of $1,564,393 and $1,092,186,
respectively. The equity in the Cooperative has increased by $284,503 since
October 31, 1997.
Trademarks
"Fazoli's," "Long John Silver's," "Dairy Queen," "Taco Bell," "Pizza Hut," and
"KFC" are registered trademarks of Seed Restaurant Group Inc., Long John
Silver's Inc., American Dairy Queen Corporation, Taco Bell Corporation, Pizza
Hut Corporation and KFC Corporation, respectively, and are used in these
materials for identification purposes only. KFC National Purchasing Cooperative,
Inc. is an independent provider of products and is not affiliated with the Seed
Restaurant Group Inc., Long John Silver's Inc., American Dairy Queen
Corporation, Taco Bell Corporation, Pizza Hut or KFC Corporation, except that
KFC Corporation is a stockholder member of the Cooperative.
9
<PAGE> 10
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security - Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K - During the quarter ended July, 31, 1998, the
Company filed a Form 8-K Current Report dated May 18, 1998, concerning Item 4,
Changes in Registrant's Certifying Accountant. No financial statements were
filed as a part of this Form 8-K Current Report.
10
<PAGE> 11
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KFC National Purchasing Cooperative, Inc.
Date: September 12, 1998 By: /s/ Thomas D. Henrion
------------------- -------------------------------------------
Thomas D. Henrion, President
Date: September 12, 1998 By: /s/ William V. Holden
-------------------- -------------------------------------------
William V. Holden,
Vice President/Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 132,471
<SECURITIES> 0
<RECEIVABLES> 46,001,193
<ALLOWANCES> 1,830,742
<INVENTORY> 3,550,061
<CURRENT-ASSETS> 48,784,745
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 50,453,302
<CURRENT-LIABILITIES> 29,456,735
<BONDS> 3,000,000
0
0
<COMMON> 0
<OTHER-SE> 17,996,567
<TOTAL-LIABILITY-AND-EQUITY> 50,453,302
<SALES> 169,404,360
<TOTAL-REVENUES> 169,404,360
<CGS> 164,976,667
<TOTAL-COSTS> 164,976,667
<OTHER-EXPENSES> 3,527,639
<LOSS-PROVISION> 347,410
<INTEREST-EXPENSE> 35,080
<INCOME-PRETAX> 136,265
<INCOME-TAX> 58,319
<INCOME-CONTINUING> 77,946
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 77,946
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
